Apple Financial Analysis Project

Abstract

Apple Inc is a transnational corporation based in Cupertino, California. The company is famous for the production of a wide range of smartphones (iPhones), media players (iPod Touch) and tablet computers (iPad). The company is well-positioned in the industry and holds a significant market share. This is mainly attributed to customer loyalty and a closed ecosystem. A closed ecosystem refers to Apple’s wide range of applications, software and gadgets that are interconnected and support each other. This report will try to analyze Apple’s financial statements in order to determine its financial position. This will involve descriptive analysis and ratio analysis. The descriptive analysis will help in understanding the organization’s trends and operations. Ratio analysis, on the other hand, will help to determine Apple’s performance and financial position.

Introduction

Company Overview

Apple is a global company that manufactures high-tech gadgets (personal computers and mobile phones) and computer programs. It is the second-largest producer of computer products after Samsung and the third-largest producer of mobile phones (Dougherty, 2010, p. 1). The company was established in the mid-1970s by Steve Jobs and Steve Wozniak in Cupertino, California. The current Chief Executive Officer (CEO) is Timothy Donald. The company has more than 350 retail stores all over the world and more than half a million employees. The majority of the employees are engineers and business staff (Carlton, 1997, p. 3).

Initially, Apple was largely a producer of personal computers such as Macintosh and Power Mac. The company experienced low sales volume and reduced market share during the early 1990s. This prompted the management to review the company’s philosophy. This led to the introduction of new products, starting with the original iMac and iPod music players (Dougherty, 2010, p. 1). At present, the company is well-known for a wide range of smartphones (iPhones), media players (iPod Touch) and tablet computers (iPad) (Apple, n.d., p. 5).

The market environment of Apple Inc is highly competitive. However, the company holds a significant market share position (Apple, n.d., p. 5). The market for its products has been spread to more than 180 countries through mass Merchandisers, departmental stores and retail stores. Its organizational structure consists of global business units, global operations and corporate functions. The business units help the company in developing suitable strategies and products in a given market (Dougherty, 2010, p. 2).

Report Purpose

This report will focus on the analysis of Apple’s financial statements in order to determine its financial position. This will involve descriptive analysis and ratio analysis. The descriptive analysis will help in understanding the organization’s trends and operations. Ratio analysis, on the other hand, will help to determine Apple’s performance and financial position.

Analysis of financial statements

Apple’s annual growth rate for the last five years is more than 42 percent, which places it among the top 10 companies in the tech industry. At the moment, the company’s total revenue is almost hitting $190 billion. Total revenue in 2011 was $108249 million, while the cost of goods sold was $ 64431 million, leading to a gross profit of $43 818 million (more details are available in appendix 1). This was a huge increment from the $65 billion achieved in the previous year. In the same fiscal, the company had over $80 billion in cash reserves. These results were achieved despite the fact that the company had lost a significant market share for some of its products. The operating expenses and income totaled $10028 million and $337990 million respectively. All these minus the provision for income tax left the company with a net income of $ 25922 million (Bloomberg, n.d., p. 2).

The revenue for the financial year ending 2012 was $156508 million, while the cost of goods sold was $ 87846 million, leaving a gross profit of $68662 million. The operating expenses and income totaled $13421 million and $55241 million respectively. All these less the provision for income tax resulted in a net income of $ 41733 million (Bloomberg, n.d., p. 2). In addition, the costs of goods sold tied up in inventories were comparatively lower than the previous year. In the same financial year, the company announced a $2.65 per share dividend and a share price of more than $700. With nearly a billion shares, its market capitalization was roughly $700 billion. This is the most astounding market capitalization ever achieved by a publicly-traded company (Bloomberg, n.d., p. 2).

Total revenue in 2013 was $17091 million, while the cost of goods sold was $ 106606 million, leading to a gross profit of $64304 million. The revenue was way below the projected figures. However, the gross profit margin was higher than its rivals in the industry.. The operating expenses and income totaled $15305 million and $48999 million in that order. The net income was $ 37037 million, which was $4696 million less than what was achieved in the previous year (Bloomberg, n.d., p. 2). Apple’s net income during the financial year ending 2013 was among the lowest in the industry. This was principally attributed to inefficiencies in revenue collection and inventory management (Bloomberg, n.d., p. 3).

On the other hand, the revenue for the financial year ending 2012 was $182795 million, while the cost of goods sold was $ 112258 million, leaving a gross profit of $70537 million. The operating expenses and income amounted to $18034 million and $52503 million correspondingly. The net income was $ 39510 million, which marked a considerable improvement in the company’s financial performance. However, Apple’s performance was still below what was achieved in the financial year ending 2012 (Bloomberg, n.d., p. 3).

The total assets, liabilities and equity for the financial year ending 2011 were $116371 million, $39756 million and $76615 million respectively. Similarly, the total assets, liabilities and equity for the financial year ending 2012 were $176064 million, $57854 million and $118210 million. The company’s equity was boosted by retained earnings. The total assets, liabilities and equity for the financial year ending 2013 were $207000 million, $83451 million, and $123549 million correspondingly (Bloomberg, n.d., p. 4).

Lastly, the total assets, liabilities and equity for the financial year ending 2014 were$231839 million, $120292 million, and $111547 million in that order. The short-term and long-term investments had a considerable impact on the asset value. The inventories also had a substantial effect on the value of total assets. It should be noted that the financial year ending 2013 and 2014 had a significant increase in total liabilities. The increase in liability as a result of increased borrowing (Bloomberg, n.d., p. 4). Although the company has inadequate liquid assets to meet its short-term obligations, the earnings are enough to service these debts. The owners’ equity has risen from $116371 million in 2011 to over 231000 million in 2014. The increment is attributed to the capital contributed during each year (Bloomberg, n.d., p. 5).

Cash from operations for the financial year ending 2011, 2012, 2013 and 2014 was $37529 million, $50856 million, $53666 million and $ 59713 million respectively (see appendix 3). On the other hand, cash from investment for the financial year ending 2011, 2012, 2013 and 2014 was $40419 million, $48227 million, $33774 million and $22579 million accordingly. The net cash change for 2011 and 2014 was negative, while net cash change for 2012 and 2013 were $931 million and $3513 million in that order. This was a result of the total dividend paid (Bloomberg, n.d., p. 5).

Ratio Analysis

The financial ratios are classified into five main categories, namely: profitability ratios, Liquidity ratios, activity ratios, Leverage ratios and equity-return ratios (Poznanski, Sadownik & Gannitsos, 2013, p. 2).

Profitability Ratios

These ratios show whether the company is making progress or going down. Profitability ratios include Return on Total Assets (ROA) and Return on Stakeholders Equity (ROE). ROA= Net Profit/ Total Assets, whereas ROE=Net Profit/Stakeholders Equity (Poznanski, Sadownik & Gannitsos 3). The return on assets ratios for the financial year ending 2011, 2012, 2013 and 2014 were 0.22275, 0.2370, 0.1789 and 0.17041 correspondingly. Similarly, ROA ratios for the whole industry for the financial year ending 2011, 2012, 2013 and 2014 were 0.2512, 0.2873, 0.3567 and 0.4115 respectively (Bloomberg, n.d., p. 2). This shows that the industry was doing relatively better than the company. Apple’s poor performance may be attributed to some of its weaknesses, for instance, inefficiencies in revenue collection and inventory management.

Table 1: Return on Asset Ratio

Company Ratios Industry Ratios
2011 0.2227 0.2512
2012 0.2370 0.2873
2013 0.1789 0.3567
2014 0.1704 0.4115

On the other hand, return on stakeholders’ equities for the financial year ending 2011, 2012, 2013 and 2014 were 0.3383, 0.3530, 0.29977 and 0.3542 in that order. This ratio represents earning per equity. The ratios increase from 2011 to 2014, except for 2013 when there was a decline. The decline is a result of a debt increase. This is one of the most reliable ratios in determining companies’ performance. ROA ratios for the entire industry for the financial year ending 2011, 2012, 2013 and 2014 were 0.2970, 0.3103, 0.3289 and 0.3415 respectively. While these ratios are comparatively low, they illustrate a positive trend (Bloomberg, 2013, p. 3).

Table 2: Return on Equity Ratio

Company Ratios Industry Ratios
2011 0.3383 0.2970
2012 0.3530 0.3103
2013 0.2997 0.3289
2014 0.3542 0.3415

Liquidity Ratios

These ratios measure the ability of the company to meet its short term obligations. Liquidity ratios include the Current ratio and Quick ratio. Current ratio=Current assets/Current liabilities (Poznanski, Sadownik & Gannitsos, 2013, p. 4). It should be more than one. Current ratios for the financial year ending 2011, 2012, 2013 and 2014 were 0.1619, 0.1603, 0.1528 and 0.1532 respectively. The two ratios show an alarming trend in the company. In a real sense, the company cannot meet short-term obligations unless it continues borrowing. The ratios for the entire industry for the financial year ending 2011, 2012, 2013 and 2014 were 1.1234, 1.0185, 0.8347 and 0.7346 correspondingly. In 2011, everything was alright for the industry until 2012 when the circumstances began to change (Bloomberg, 2013, p. 3).

Table 3: Current Ratio

Company Ratios Industry Ratios
2011 0.1619 1.1254
2012 0.1603 0. 0185
2013 0.1528 0.8347
2014 0.0.1532 0.7346

Quick ratio=Current Assets-Inventory/Current Liabilities (Poznanski, Sadownik & Gannitsos, 2013, p. 4). Quick ratios for the financial year ending 2011, 2012, 2013 and 2014 were 0.1342, 0.1398, 0.1353 and 0.1200 respectively. This means that the company cannot pay the claims of short-term creditors and the trend is also getting worse. The ratios for the entire industry for the financial year ending 2011, 2012, 2013 and 2014 were 1.3421, 1.1349, 0.9247 and 0.8585 respectively. This means the industry is facing a similar fate, but the conditions are less severe (Bloomberg, 2013, p. 3).

Table 4: Quick Ratio

Company Ratios Industry Ratios
2011 0.1342 1.3421
2012 0.1398 1.1349
2013 0.1353 0.9247
2014 0.1200 0.8585

Activity Ratios

These ratios show how the company is overseeing the use of its assets. Activity ratios include inventory turnover and Days’ sales Outstanding. Inventory turnover= Cost of goods sold/Inventory (Poznanski, Sadownik & Gannitsos, 2013, p. 5). Inventory turnovers for the financial year ending 2011, 2012, 2013 and 2014 were 74.4, 76.23, 85.72 and 79.32 in that order. On the other hand, the ratios for the whole industry for the financial year ending 2011, 2012, 2013 and 2014 were 74.4, 76.23, 85.72 and 79.32 respectively. There was a positive trend in the turnover rate in 2011 and 2012, before it started dipping. The industry also had a positive trend until 2014 when things started changing (Bloomberg, n.d., p. 3; Luan, 2011, p. 13).

Table 7: Inventory turnover

Company Ratios Industry Ratios
2011 83.02 74.4
2012 111.05 76.23
2013 60.43 85.72
2014 53.17 79.32

Leverage Ratios

These ratios show the amounts of debt or equity used to finance the business. Businesses are highly leveraged if they use more borrowings than equity. The balance between the two is normally referred to as capital structure. The main leverage ratios include the Debt to Asset ratio and Debt to Equity ratio. Debt to asset ratio= total debt/total assets, whereas debt to equity ratio=total debt/total equity (Poznanski, Sadownik & Gannitsos, 2013, p. 6). Debt to asset ratios for the financial year ending 2011, 2012, 2013 and 2014 were 0.3416, 0.3286, 0.4031 and 0.5188 correspondingly. The figures show an increasing trend of borrowing to finance the business. The ratios for the whole industry for the financial year ending 2011, 2012, 2013 and 2014 were 0.2874, 0.29987, 0.3124 and 0.3591 respectively. The industry also follows the same trend, but is less dependent on borrowing as compared to the company.

Table 5: Debt to Asset Ratio

Company Ratios Industry Ratios
2011 0.3416 0.2874
2012 0.3286 0.2998
2013 0.4031 0.3124
2014 0.5188 0.3591

The debts to equity ratios for the financial year ending 2011, 2012, 2013 and 2014 were 0.5189, 0.4894, 0.6773 and 1.0783 respectively. The industry ratios for the financial year ending 2011, 2012, 2013 and 2014 were 0.3367, 0.3576, 0.4241 and 0.4362 in that order (Bloomberg, n.d., p. 4). Based on the figures from the table below, it is evident that for each dollar of stockholders’ equity, the company has less liability than the industry as a whole.

Table 6: Debt to Equity Ratio

Company Ratios Industry Ratios
2011 0.5189 0.3367
2012 0.4894 0.3576
2013 0.6773 0.4241
2014 1.0783 0.4362

Conclusion

Apple is among the top tech companies in the world. The company is well-positioned in the tech industry. This is mainly attributed to customer loyalty and a closed ecosystem. A closed ecosystem refers to Apple’s wide range of applications, software and gadgets that are interconnected and support each other. Apple is well-known for novelty and production of exclusive products. Its revenue has grown by more than 40 percent in the last five years. In fact, as of September 2014, the company’s revenue totaled $182.8 billion. However, increased competition has forced the company to rely on borrowings to finance its business. This has significantly affected its financial position.

References

Apple. (2014). iOS Security. Web.

Bloomberg. (n.d.). Apple Inc. (AAPL: NASDAQ GS). Web.

Carlton, J. (1997). Apple: The inside story of intrigue, egomania, and business blunders, New York: Random House.

Dougherty, M. (2010). The History of Apple, Inc. Web.

Luan, W. (2011). Apple Inc., Copenhagen: Copenhagen Business College.

Poznanski, J., Sadownik, B., & Gannitsos, I. (2013). Financial Ratio Analysis. Web.

Appendices

Appendix 1: Income statement

Currency in
Millions of US Dollars
As of: Sep 24
2011
Sep 29
2012
Sep 28
2013
Sep 27
2014
Revenues 108,249.0 156,508.0 170,910.0 182,795.0
TOTAL REVENUES 108,249.0 156,508.0 170,910.0 182,795.0
Cost of Goods Sold 64,431.0 87,846.0 106,606.0 112,258.0
GROSS PROFIT 43,818.0 68,662.0 64,304.0 70,537.0
Selling General & Admin Expenses, Total 7,599.0 10,040.0 10,830.0 11,993.0
R&D Expenses 2,429.0 3,381.0 4,475.0 6,041.0
OTHER OPERATING EXPENSES, TOTAL 10,028.0 13,421.0 15,305.0 18,034.0
OPERATING INCOME 33,790.0 55,241.0 48,999.0 52,503.0
Interest Expense -136.0 -384.0
Interest and Investment Income 519.0 1,088.0 1,616.0 1,795.0
NET INTEREST EXPENSE 519.0 1,088.0 1,480.0 1,411.0
Currency Exchange Gains (Loss) -658.0 -301.0 -105.0
Other Non-Operating Income (Expenses) -104.0 92.0 -23.0 -121.0
EBT, EXCLUDING UNUSUAL ITEMS 34,205.0 55,763.0 50,155.0 53,688.0
Gain (Loss) on Sale of Investments -205.0
EBT, INCLUDING UNUSUAL ITEMS 34,205.0 55,763.0 50,155.0 53,483.0
Income Tax Expense 8,283.0 14,030.0 13,118.0 13,973.0
Earnings from Continuing Operations 25,922.0 41,733.0 37,037.0 39,510.0
NET INCOME 25,922.0 41,733.0 37,037.0 39,510.0
NET INCOME TO COMMON INCLUDING EXTRA ITEMS 25,922.0 41,733.0 37,037.0 39,510.0
NET INCOME TO COMMON EXCLUDING EXTRA ITEMS 25,922.0 41,733.0 37,037.0 39,510.0

Appendix 2: Balance sheet

Currency in
Millions of US Dollars
As of: Sep 24
2011
Sep 29
2012
Sep 28
2013
Sep 27
2014
Assets
Cash and Equivalents 9,815.0 10,746.0 14,259.0 13,844.0
Short-Term Investments 16,137.0 18,383.0 26,287.0 11,233.0
Trading Asset Securities 44.0 81.0
TOTAL CASH AND SHORT TERM INVESTMENTS 25,952.0 29,129.0 40,590.0 25,158.0
Accounts Receivable 5,369.0 10,930.0 13,102.0 17,460.0
Other Receivables 6,348.0 7,762.0 7,539.0 9,759.0
TOTAL RECEIVABLES 11,717.0 18,692.0 20,641.0 27,219.0
Inventory 776.0 791.0 1,764.0 2,111.0
Deferred Tax Assets, Current 2,014.0 2,583.0 3,453.0 4,318.0
Restricted Cash 278.0 164.0
Other Current Assets 4,529.0 6,180.0 6,674.0 9,725.0
TOTAL CURRENT ASSETS 44,988.0 57,653.0 73,286.0 68,531.0
Gross Property Plant and Equipment 11,768.0 21,887.0 28,519.0 39,015.0
Accumulated Depreciation -3,991.0 -6,435.0 -11,922.0 -18,391.0
NET PROPERTY PLANT AND EQUIPMENT 7,777.0 15,452.0 16,597.0 20,624.0
Goodwill 896.0 1,135.0 1,577.0 4,616.0
Long-Term Investments 55,618.0 92,122.0 106,215.0 130,162.0
Other Intangibles 3,536.0 4,224.0 4,179.0 4,142.0
Other Long-Term Assets 3,556.0 5,478.0 5,146.0 3,764.0
TOTAL ASSETS 116,371.0 176,064.0 207,000.0 231,839.0
LIABILITIES & EQUITY
Accounts Payable 14,632.0 21,175.0 22,367.0 30,196.0
Accrued Expenses 4,829.0 6,749.0 8,427.0 12,028.0
Short-Term Borrowings 6,308.0
Current Income Taxes Payable 1,140.0 1,535.0 1,200.0 1,209.0
Other Current Liabilities, Total 1,240.0 1,638.0 2,967.0 4,159.0
Unearned Revenue, Current 6,129.0 7,445.0 8,697.0 9,548.0
TOTAL CURRENT LIABILITIES 27,970.0 38,542.0 43,658.0 63,448.0
Long-Term Debt 16,960.0 28,987.0
Unearned Revenue, Non-Current 1,686.0 2,648.0 2,625.0 3,031.0
Deferred Tax Liability Non-Current 8,159.0 13,847.0 16,489.0 20,259.0
Other Non-Current Liabilities 1,941.0 2,817.0 3,719.0 4,567.0
TOTAL LIABILITIES 39,756.0 57,854.0 83,451.0 120,292.0
Common Stock 13,331.0 16,422.0 19,764.0 23,313.0
Retained Earnings 62,841.0 101,289.0 104,256.0 87,152.0
Comprehensive Income and Other 443.0 499.0 -471.0 1,082.0
TOTAL COMMON EQUITY 76,615.0 118,210.0 123,549.0 111,547.0
TOTAL EQUITY 76,615.0 118,210.0 123,549.0 111,547.0
TOTAL LIABILITIES AND EQUITY 116,371.0 176,064.0 207,000.0 231,839.0

Appendix 3: Cash flow statement

Currency in
Millions of US Dollars
As of: Sep 24
2011
Sep 29
2012
Sep 28
2013
Sep
27 2014
NET INCOME 25,922.0 41,733.0 37,037.0 39,510.0
Depreciation & Amortization 1,622.0 2,672.0 5,797.0 6,846.0
Amortization of Goodwill and Intangible Assets 192.0 605.0 960.0 1,100.0
DEPRECIATION & AMORTIZATION, TOTAL 1,814.0 3,277.0 6,757.0 7,946.0
Other Operating Activities 2,868.0 4,405.0 1,141.0 2,347.0
Change in Accounts Receivable 143.0 -5,551.0 -2,172.0 -4,232.0
Change in Inventories 275.0 -15.0 -973.0 -76.0
Change in Accounts Payable 2,515.0 4,467.0 2,340.0 5,938.0
Change in Unearned Revenues 1,654.0 2,824.0 1,459.0 1,460.0
Change in Other Working Capital 1,170.0 -2,024.0 5,824.0 3,957.0
CASH FROM OPERATIONS 37,529.0 50,856.0 53,666.0 59,713.0
Capital Expenditure -4,260.0 -8,295.0 -8,165.0 -9,571.0
Cash Acquisitions -244.0 -350.0 -496.0 -3,765.0
Sale (Purchase) of Intangible Assets -3,192.0 -1,107.0 -911.0 -242.0
Investments in Marketable & Equity Securities -32,464.0 -38,427.0 -24,042.0 -9,017.0
CASH FROM INVESTING -40,419.0 -48,227.0 -33,774.0 -22,579.0
Short-Term Debt Issued 6,306.0
Long-Term Debt Issued 16,896.0 11,960.0
TOTAL DEBT ISSUED 16,896.0 18,266.0
Issuance of Common Stock 831.0 665.0 530.0 730.0
Repurchase of Common Stock -22,860.0 -45,000.0
Common Dividends Paid -2,488.0 -10,564.0 -11,126.0
TOTAL DIVIDEND PAID -2,488.0 -10,564.0 -11,126.0
Other Financing Activities 613.0 125.0 -381.0 -419.0
CASH FROM FINANCING 1,444.0 -1,698.0 -16,379.0 -37,549.0
NET CHANGE IN CASH -1,446.0 931.0 3,513.0 -415.0

Appendix 4: Statement of owner’s Equity

Currency in millions of US Dollars Sept 24
2011
Sept 29
2012
Sept 28
2013
Sept27
2014
Balance at the beginning of the year
Capital contributed during the year
Drawings
62841.0
13774.0
_
101289.0
16921.0
_
104256.0
19764.0
(471.0)
87152.0
24395
_
Balance at the end of the year 76615.0 118210.0 123549.0 111547.0

Appendix 5: Ratio Analysis

ROA= Net Profit/ Total Assets

2011            2012          2013           2014

Net Profit 25,922.0 41,733.0 37,037.0 39,510.0
Total Assets 116,371.0 176,064.0 207,000.0 231,839.0
Company ratios 0.2227  0.2370 0.1789 0.1704
Industry ratios  0.2512  0.2873  0.3567  0.4115

ROE= Net Profit/ Stakeholders Equity

2011      2012          2013         2014

Net Profit 25,922.0 41,733.0 37,037.0 39,510.0
Stakeholders Equity 76,615 118210 123549 111547
Company ratios  0.3383  0.3530  0.2997  0.3542
Industry ratios  0.2970 0.3103 0.3289  0.3415

Current ratio= CA/ CL

2011      2012     2013     2014

CA 4529 6180 6674 9725
CL 27970 38542 43658 63448
Company ratios 0.1619  0.1603 0.1528  0.1532
Industry ratios 1.1254  1.0185  0.8347  0.7346

Quick ratio= CA-Inventory/ CL

2011      2012     2013     2014

CA-Inventory 4529 6180 6674 9725
CL 27970 38542 43658 63448
Company ratios 0.1342 0.1398 0.1353 0.1200
Industry ratios  1.3421  1.1349 0.9247   0.8585

Debt to asset ratio= total debt/total assets

2011          2012           2013            2014

Total debt 39,756.0 57,854.0 83,451.0 120,292.0
Total assets 116,371.0 176,064.0 207,000.0 231,839.0
Company ratios 0.3416 0.3286 0.4031 0.5188
Industry ratios 0.2874 0.2998 0.3124 0.3591

Debt to equity ratio= total debt/total equity

2011          2012         2013       2014

Total debt 39,756.0 57,854.0 83,451.0 120,292.0
Total equity 76,615 118210 123549 111547
Company ratios  0.5189 0.4894  0.6773  1.0783
Industry ratios  0.3367 0.3576 0.4241  0.4362

Inventory turnover

2011    2012      2013     2014

Cost of Sales 64431 87846 106606 112258
Inventory  776  791  1764  2111
Company ratios 83.02  111.05 60.43 53.17
Industry ratios 74.4 76.23  85.72 79.32

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